explain how the four business events below principally affect the return on total assets for a farmer’s company. Assume that all else is equal as you explain each business event separately. Finally, explain the four events’ joint effect on the farm’s long-term financial prospects.
The farmer
1. buys a new tractor, paid in cash.
2. makes a depreciation of the tractor at year’s end.
3. the price of diesel is suddenly but lastingly decreased by 15 %.
4. increases the farm’s equity by a cash payment from the farmer (owner).
How the four business events below principally affect the return on total assets?
Details:
Answers (1)
Return on assets = EBIT/ Net total assets so:
1. Cash will fall from purchase but vehicles will rise on BS so total assets does not change. Buying a new tractor is considered an investment and not an expense so will not change EBIT but simply make assets more illiquid. Will not change ROTA.
2. Depreciation will be charged as an expense at the end of the accounting period. EBIT will fall but so will total assets as accumulated depreciation contra-asset account will be credited by same amount (double check this second part and whether it decreases TA straight away will depreciation CA account) so will not change ROTA
3. Operating expenses fall so EBIT increases --> ROTA does not change.
4. Increase in SE and TA (due to increase in cash) will not be considered revenue. ROTA will fall as a result.
Be aware that I have thought these out on the spot so there may be some mistakes that I am forgetting as of now. Double check in any case.
For 3 i meant to say that ROTA increases